This is the first of four chapters on double bottoms. Each chapter represents a
different bottom shape. An Adam & Adam double bottom reminds me of a person
on stilts: narrow legs perhaps made of single spikes that touch the ground
near the same price.
The Results Snapshot shows the important numbers. Adam & Adam double
bottoms (AADBs) sport decent break-even failure rates with mediocre average
rises. Throwbacks occur in nearly two out of three trades, so you may be
able to add to your position or initiate a new one during a throwback. Surprises
are many and most relate to volume. I discuss all of them in the Statistics section.

Tour

Figure 13.1 shows the first example of an Adam & Adam double bottom. Since
we are looking at bottoms, the pattern forms at the end of a downward price
plunge. The pattern can also appear in the corrective phase of a measured move
up. Notice the twin spikes (bottoms) that happen so often in this pattern. They
drop well below the surrounding price lows yet stop near the same price level.
The rounded turn connecting the two bottoms need not be rounded at all—
many times, it appears irregular. Volume is higher on the left bottom than on the
right, as in this example. Thus, the volume trend recedes from bottom to bottom
yet takes on a

An Adam & Adam double bottom with twin spikes, volume heavier
on the left bottom than the right, and U-shaped volume.

The confirmation line marks the highest high in the pattern. A twin bottom
pattern is not a valid double bottom until price closes above the confirmation
line. That occurrence signals a breakout and time to take a position in the stock.
But before you do, check the identification guidelines to be sure you have a good
pattern.

Identification Guidelines

The double bottom pattern is one of the easier patterns to identify, but I have
expanded the identification characteristics table (Table 13.1) for this pattern and
made the recommendations more specific.

Downward price trend.

Look for price to be tending downward into the
pattern. A study documented in my book, Trading Classic Chart Patterns (Wiley
2002), suggests that performance improves for patterns with trends leading to
the pattern less than 6 months long. Most of the time (58%), a short-term (0 to
3 months) downtrend precedes the pattern.

Bottom shape.

The shape of each bottom should appear similar. That
means both should look narrow, not one wide and one narrow, perhaps with a
long, downward price spike or tail. To gauge the width, look at the top of the bottom.
I know that sounds confusing, but the top end of the spike will be wider
than the base. (Eve bottoms will appear more rounded and wider than will their
Adam counterparts.)

Identification Guidelines

215

Table 13.1

Identification Characteristics

Characteristic Discussion

Downward price Price trends downward leading to the double bottom and should
trend not drift below the left bottom.
Bottom shape Narrow, V-shaped bottoms, sometimes composed of long, oneday
spikes.
Rise between At least 10% from the lowest valley to the highest peak between
bottoms the two bottoms. Taller patterns perform better.
Bottom low Bottom to bottom price variation is small. Best performance is
prices between 2% and 5% variation.
Bottom Bottoms should be at least a few weeks apart. Best performance is
separation 3–6 weeks apart. Wider than 8 weeks and performance deteriorates.
Price rise after Price must close above the confirmation point without first falling
right bottom below the right bottom low.
Bottom volume Usually higher on the left bottom than the right.
Confirmation The highest high between the two bottoms. A close above the
price confirmation point is the breakout and confirms the pattern as a
valid double bottom.

When judging bottom shape, ask yourself if the bottoms look the same or
different. If they look the same, then you have either Adam & Adam or Eve &
Eve bottoms. Narrow bottoms signify the Adam variety and wide bottoms signify
the Eve variety.

Rise between bottoms.

Look for a rise between the twin bottoms of at
least 10%, as measured from the lowest bottom low to the highest high between
the two bottoms. For example, consider Figure 13.2, which shows an AADB.
The pattern has two narrow bottoms, both with spikes (the left longer than the
right), and volume that is higher on the left side than on the right. Twin bottom
AB (upper left) may look like a double bottom but the 4% rise measured from
A to C is not high enough to be a true double bottom. The 10% rise figure is
an arbitrary one, but I will show that the higher the number, the better the performance
(that is, tall patterns perform better than short ones).

Bottom low prices.

From the lowest low on the left bottom to the low on
the right, the price variation should be small. For example, do not try to assign
double bottom status to the right bottom and point D in Figure 13.2. Point D
does not drop close enough to the right bottom to qualify it as a valid bottom.
After gathering statistics on AADBs, I found that the best performance
comes from bottoms in which the price variation is between 2% and 5%. Patterns
with a lower right bottom also perform better after the breakout.

Bottom separation.

How far apart should the bottoms be? Some texts
say that bottoms must be at least a month apart, but I set no such limit. I stip-

An Adam & Adam double bottom with a throwback. Pattern AB
(upper left) is not a double bottom because the rise to C is not high enough.

ulated that the bottoms should be distinct minor lows, not lows that are part of
the same congestion pattern. I found that the best separation is for bottoms 3
to 6 weeks part. Bottoms farther apart than 8 weeks showed performance deteriorating.
I measured the bottom distance between the lowest low in each valley
(which also marked the beginning and ending of each AADB pattern).

Price rise after right bottom.

After price digs the second valley in the
double bottom pattern, prices take time to rise to confirmation. What you need
to avoid is prices drifting down and making a third bottom. Another bottom near
the same price as the first two qualifies the pattern as a triple bottom (but you
still have to wait for confirmation). I removed from consideration any pattern
with a third bottom falling below the other two (it is not a triple bottom and
price did not confirm the AADB).

Bottom volume.

The left bottom usually shows higher volume. However,
volume higher on the right side should not exclude the pattern from consideration.
Figures 13.1 and 13.2 show volume higher on the left bottom than on the
right. We will see that AADBs with higher left volume perform better.

Confirmation price.

A twin bottom pattern is not a valid double bottom
until price closes above the high between the two bottoms. Always wait for confirmation
before taking a position in a stock because price continues down 64%
of the time—and that is in a bull market, too!
Figure 13.3 shows two examples of double bottoms. Are they double bottoms
or just twin valley patterns? In both cases, the price trend leading to the

Shown are two Adam & Adam double bottoms. The horizontal lines
are the confirmation lines. A close above the line means the pattern is a true AADB.

patterns is downward, as required. The bottoms are pointed with one-day spikes.
All bottoms are

V shaped, not rounded turns. The rise to the confirmation line
is 24% for the August bottom and 17% for the October pattern.
The prices at each bottom are close enough to each other that they look
like bottoms, not rising steps. The time between the twin bottoms is 3 weeks
for the August example and 2 weeks for the October bottom. Prices rise to the
confirmation point in a snappy manner, closing above the highest high in just
a few days.
The volume pattern is unexciting, including the breakout volume. In both
examples, volume is higher on the left bottom than on the right. The breakout
volume is slightly above the 30-day average, classifying the breakout as having
heavy volume. Thus, both patterns shown in Figure 13.3 are valid double bottoms.
However, prices rise just 18% and 16% after the breakout. How can we
tell the outperformers from the also-rans?

Focus on Failures

Figure 13.4 shows the first double bottom failure and it is typical. The pattern
has valleys that form after a short-term downward price trend and bottom near

An Adam & Adam double bottom confirmed when price closed above
the confirmation line, but price soon stalled. Overhead resistance (not shown) may
have played a part, but other stocks in the industry were showing topping patterns.

the same price. The valleys are 29 days apart, with a 17% rise between them.
The AADB pattern confirms when price rises above the confirmation line.
Price climbs just 2% after the breakout. Why so low? The first clue is that
the pattern is in a bear market, which is never good for bullish chart patterns.
The downward price trend starts at the March peak, so it is less than a month
long. Before that, prices started climbing from the October 2000 lows. In other
words, the double bottom did not act as a reversal of the longer-term prevailing
price trend, but as a consolidation.
If you extended the figure to the left, you would see a long line of peaks
stretching to May 2000. That line represented a massive zone of resistance that
the double bottom could not pierce. A check of other companies in the diversified
natural gas industry showed that most of them had stocks peaking in May
or June. They all started tumbling at the same time. A check of them showed
that topping patterns predominated (double tops and triple tops), signaling a
downward price trend. Thus, a smart investor would have not taken this trade.
Figure 13.5 shows an example of a second type of failure that perhaps you,
too, have seen. Ted is a novice investor with an attitude. He looks at the stock
chart, checks the identification guidelines, and believes that the stock is making
a double bottom. When prices rise after the second bottom, Ted decides to
pull the trigger early and buys the stock, receiving a fill at 42.63. He reasons
that all the indications suggest the stock has completed a valid double bottom.

Example of second type of failure—failing to wait for breakout confirmation.
Ted decided to get an early start on the double bottom but ended up
losing money.

That being the case, why not get in now while the price is still low instead of
waiting for prices to rise above the confirmation point (46.25)? Ted makes a
good point. He is pleased with the stock’s performance until it begins to round
over. Does he sell out now at a small profit or should he hold on and risk a
downturn while waiting for additional gains? This is a recurring investor
dilemma.
He decides to hang onto his position. During May, the stock surges upward
again before beginning a downhill run. Ted watches in horror as his profit vanishes
and losses mount. Eventually, when prices spike downward, he sells at the
opening the next day and close out his position.
What did he do wrong? He failed to wait for breakout confirmation. Prices
must close above the confirmation point before a trade is placed. Otherwise your
chances of success are only one in three.

Statistics

Table 13.2 shows general statistics for this chart pattern.

Number of formations.

I found 281 AADBs in 500 stocks from mid-1991
to mid-1996 and from 2000 to 2004, with others between those dates.

Reversal or continuation.

The pattern is a bottom with an upward breakout.
Thus, all acted as reversals of the downward price trend, by definition.

Average rise.

The 35% rise is about what you would expect from a bullish
pattern in a bull market. The 24% bear market result surprised me because
it is so low, but it nears the average of all other chart pattern types (25%).

Rises over 45%.

How well does this pattern do? In a bull market, over a
quarter of the patterns (28%) climbed over 45%. Patterns in a bear market also
held up well, with 15% soaring more than 45%.

Once prices top out at the ultimate high, then
what happens? They tumble about 33%. In a bear market, the decline gives up
all the gains and more.
For aggressive traders in a bear market, wait for prices to peak then short
the stock and ride it down. The trick, of course, is to buy just after it peaks. How
can you tell when the stock peaks? Look for topping patterns that break out
downward in other stocks, especially those in the same industry. A strong market
downturn is also helpful. Or, trade a busted pattern.

Busted pattern performance.

Busted patterns have good bearish performance
but the samples are few. Busted patterns are easy to spot (like the one in
Figure 13.4) because price climbs less than 5% before tumbling. Short the stock
when you are sure prices are heading down and not just completing a throwback.

Standard & Poor’s 500 change.

The S&P 500 index climbed in both
bull and bear markets by 16% and 1%, respectively. The strong push from the
general market helped the chart pattern perform in a bull market.

Days to ultimate high.

How long did it take price to reach the ultimate
high? Answer: about 4 months in a bull market and 3.5 months in a bear market.
Table 13.3 lists failure rates. AADBs have single-digit break-even failure
rates that climb as the maximum price rises. For example, 5% of the patterns in
a bull market fail to rise at least 5% after the breakout. Over a quarter (26%) rise
less than 15% in a bull market and 35% fail to rise at least 15% in a bear market.
Half the patterns top out after gains of just over 25% in a bull market and 20%
in a bear market.
Perhaps the biggest surprise is how quickly the failure rates climb. In a bull
market, they triple from 5% to 17%. Bear markets double from 7% to 15% and
then double again to 35% as the maximum price climbs 5%, 10%, and 15%.
The table gives you some idea how typical double bottoms work. It also
suggests that you should stick to trading double bottoms in a bull market
(because of lower failure rates).

Another use of Table 13.3 is to check on the measure rule prediction, discussed
in the Trading Tactics section later. Suppose it predicts a rise from 10 to
13 in a bear market. That is a 30% move. How many patterns will rise at least that
far? Answer: 32% (68%, on average, will fail to make it that far). Thus, it appears
that the target is too far away, and you should anticipate price topping out sooner.
Table 13.4 shows breakout- and postbreakout-related statistics.

Formation end to breakout.

It takes just over a month, on average, for
prices to rise from the low at the right bottom to the breakout. As the figures in
this chapter show, there is wide variation.

Yearly position.

Where in the yearly price range does the AADB breakout
occur most often? For both bull and bear markets, the middle of the yearly
trading range is the most popular.

Yearly position, performance.

Where in the yearly range do the best
performing AADBs reside? The answer depends on market conditions. In a
bull market, AADBs with breakouts near the yearly low do best. In a bear market,
those in the middle of the range do best, but the samples are few.

Throwbacks.

A throwback occurs in almost two of every three trades.
That is a high return rate. Thus, if you missed investing in a double bottom, you
may have another opportunity if it throws back.
The average time to throwback is 9 to 11 days. When an AADB throws
back, performance suffers, so be sure to check for (and avoid) overhead resistance
before trading.

222

Double Bottoms, Adam & Adam

Table 13.4

Breakout and Postbreakout Statistics

Description Bull Market Bear Market

Formation end to breakout 38 days 35 days
Percentage of breakouts occurring
near the 12-month low (L),
center (C), or high (H) L32%, C43%, H25% L32%, C35%, H33%
Percentage rise for each 12-month
lookback period L40%, C32%, H39% L28%

a, C31%a, H16%a

Throwback 64% 61%
Average time to throwback ends 11 days 9 days
Average rise for patterns with
throwback 28% 23%
Average rise for patterns without
throwback 44% 26%

Breakout day gaps help performance in a bull market but show no
performance improvement in a bear market. Usually, the gap size in a bear market
is huge compared to the bull market one, but not in this case. Blame the
small sample count.
Table 13.5 shows a frequency distribution of days to the ultimate high.
Many of the patterns reach the ultimate high after 70 days (50% of them in a
bull market). Fewer than 20% top out in the first week.
Look what happens after 35 days. In both markets, more patterns top out
(9% in a bear market and 5% in a bull market). That finding suggests price
weakens slightly during that time. Thus, be prepared to close out your trade a
month after the breakout.
Table 13.6 shows statistics related to size.

Do tall patterns perform better than short ones? Yes. To use this
finding, measure the height from the highest high to the lowest low in the pattern
and then divide by the breakout price (the highest high). Compare the result
with the median shown in the table. A value higher than the median means you
have a tall pattern. Lower than the median and you have a short one. Trade only
tall patterns for the best performance.

Width.

Narrow patterns outperform only in a bear market. The bull market
shows no performance difference for width. I used the median length as the
separator between narrow and wide.

Average formation length.

The average double bottom length measured
slightly fewer than 2 months. I used the time between the lowest lows of
each bottom.

Height and width combinations.

AADBs both tall and wide performed
better in a bull market. Short and narrow AADBs did well in a bear market, but
the sample size is small. Avoid short and wide patterns as they showed the worst
performance.

Bottom price variation.

I checked to see if AADBs with large price variations
(between bottom lows) performed better or worse than did those with
minor variations. In a bull market, AADBs with large price variations performed
better. AADBs with small price variations did better in a bear market.

Lower bottom performance.

When the right bottom had a lower price
than the left, the AADB tended to outperform, sometimes substantially (bull
market: 39% versus 29% rise).
Table 13.7 shows volume-related statistics.

When volume recedes from bottom to bottom, the
postbreakout performance is superior to those AADBs that have a rising volume
trend.

Volume shapes.

The most common volume shape is U (then domed, then
random). Assigning performance to those patterns with various volume shapes,
we find that those with dome-shaped volume perform best. The worst performance
came from AADBs with a random volume shape.

Breakout volume.

Does a heavy volume breakout propel prices farther?
Yes. I compared the 1-month volume average (leading to the breakout) to the
breakout day volume. Those patterns with volume heavier than the average did
better than did those with light breakout volume.

Bottom volume.

I tallied the 5-day average volume surrounding each
bottom (2 days before to 2 days after the lowest low) and compared it to the
average of the opposite bottom. The best performance came when the left bottom
showed heavier volume than the right bottom.

Trading Tactics

Table 13.8 shows trading tactics.

Measure rule.

Use the measure rule to compute a target price. In a bull
market, prices hit the target 66% of the time, but just 48% of the time in a bear
market.
To find the target, subtract the lowest low in whichever bottom is lower
from the highest high between the two bottoms. Add the difference to the highest
high. The result is the minimum price move to expect. For example, look at
Figure 13.6. The highest high is at 20 (the breakout price or confirmation line)

Trading Tactics

225

Table 13.8

Trading Tactics

Trading Tactic Explanation

Measure rule Compute the height from the highest high between
the two bottoms to the lower of the two bottoms then
add the difference to the highest high. The result is the
target price.
Wait for breakout Always wait for confirmation (a close above the highest
high).
Trade with market trend To improve your odds, trade this bullish pattern in a
bull market.
Check others in the industry Are other stocks in the same industry showing bottoming
patterns?
Throwback Initiate or add to your position once price starts
rebounding after a throwback.

and the right bottom is lower, at 15.50. Add the difference, 4.50, to the highest
high to get the target, or 24.50.

Wait for breakout.

Since AADBs act as reversals of the prevailing price
trend, there is 64% chance that prices will continue declining instead of confirming
the double bottom. That is why you should wait for a breakout (a close
above the confirmation line, which is the price of the highest high between the
two bottoms). Buying before the breakout is an easy way to lose money.

Trade with market trend.

Since this pattern performs best in a bull
market, avoid trading it in a bear market. Look at the fundamentals and see if
there is a reason for the stock to reverse the downward price trend.

Check others in the industry.

What are other stocks in the same industry
doing? If they are showing signs of bottoming, then the AADB becomes
more important. If the other stocks are continuing down, avoid trading the double
bottom. Chances are the stock will fail to perform as expected.

Throwback.

Since a throwback occurs 64% of the time in a bull market
and 61% in a bear market, you can initiate a position after the throwback completes
or add to your position. Before investing, wait for prices to begin rebounding
and then buy. Otherwise, the throwback may send prices down like that
shown in Figure 13.4.

Randy traded the stock shown in Figure 13.6 and made a tidy sum of money. Let
me tell you how he did it. First he qualified the pattern as a true double bottom
by reviewing the identification characteristics listed in Table 13.1. Briefly, the
stock started down in early January after a long-term uptrend that began in
February 1995. The twin bottoms were narrow with one-day downward spikes.
The rise between bottoms measured 29%; the bottom lows were 1% apart in
price and separated by 64 days. Oddly, the right bottom showed higher volume.
He placed an order to buy the stock at the confirmation price. Thus, he would
get in at a good price and received a fill at 20.
The stock struggled by moving sideways for a week then achieved liftoff.
Price climbed until early June when it started retracing. The retrace turned
into a throwback when price pierced the confirmation line at 20. Prices moved
up again and retraced, forming the handle of a cup-with-handle pattern. Randy
drew a down-sloping trend line along the handle, and the day after price closed
above the trend line, he bought more, receiving a fill at 22.73.
He computed the target price for the AADB (24.50, see the “Measure rule”
in Table 13.8) and smiled when prices passed that, moving up. Then, he drew
an up-sloping trend line following the contours of the handle (called the “Sell
Trendline” in Figure 13.6). He vowed to sell the day after price closed below the
trend line, which it did in late November (not shown), and he received a fill at
32. That was down considerably from the high at 38.19, but he made 60% on
his first trade and 41% on the cup-with-handle trade.

For Best Performance

The following list includes tips and observations to help select Adam & Adam
double bottoms that perform better after the breakout. Consult the associated
table for more information.
• Review the identification characteristics for correct selection and performance
tips—Table 13.1.
• Select patterns in a bull market. They have the largest average rise—
Table 13.2.
• Patterns in a bull market have the lowest failure rate—Table 13.3.
• Throwbacks hurt performance, so avoid patterns with overhead
resistance—Table 13.4.
• Look for price weakness a month after the breakout—Table 13.5.
• Select tall patterns. Avoid ones that are both short and wide—
Table 13.6.

رد: يا اهل اسمنت السعودية

For Best PerformanceThe following list includes tips and observations to help select Adam & Adamdouble bottoms that perform better after the breakout. Consult the associatedtable for more information.• Review the identification characteristics for correct selection and performancetips—Table 13.1.• Select patterns in a bull market. They have the largest average rise—Table 13.2.• Patterns in a bull market have the lowest failure rate—Table 13.3.• Throwbacks hurt performance, so avoid patterns with overheadresistance—Table 13.4.• Look for price weakness a month after the breakout—Table 13.5.• Select tall patterns. Avoid ones that are both short and wide—Table 13.6.For Best Performance 227• Pick AADBs with a lower right bottom—Table 13.6.• Select patterns with a falling volume trend and dome-shaped volume—Table 13.7.• Patterns with heavy breakout volume do well—Table 13.7.• Patterns with volume heavier on the left bottom outperform—Table 13.7.

رد: يا اهل اسمنت السعودية

The Adam and Eve combinations of double bottoms and tops are a relatively
new addition to my trading arsenal. I found out about them in 2001 from a Web
site. The Adam bottom looks narrow and

V-shaped, perhaps with a large downward
price spike. The Eve bottom is wide, rounded, and sometimes has many
short spikes like weeds sprouting in a lawn.
Performance is similar across the various combinations of Adam and Eve
double bottoms (AEDBs). Still, I treat each as a separate pattern just to be sure.
The Results Snapshot shows the important performance numbers.
The average rise in a bear market is quite good, almost as good as the 37%
rise in a bull market. Throwbacks occur about half the time, but when they happen,
performance suffers. Speaking of performance, the following characteristics
appear in AEDBs that perform well: tall patterns, patterns with a receding
volume trend, and volume heavier on the left bottom. I discuss these findings
in the Statistics section.